Introduction

In the recent decision of Joint and Several Liquidators of Hong Tak (Lin Fat) Home for the Aged Co Ltd (in liq) v Lee Tao Ying (李桃英) & Anor [2025] 5 HKC 459, the Court of First Instance considered the liquidators’ misfeasance claims against directors under section 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the “Ordinance”). The case highlights the application of the “creditor duty” to directors’ decisions on dividends when a company is insolvent.

Background

Hong Tak (Lin Fat) Home for the Aged Company Limited (the “Company”) operated nursing homes for the elderly. The respondents were the Company’s sole directors and shareholders. The audited financial statements from 2018 to 2020 showed HK$2,050,000 as amounts due from the directors between April 2017 and June 2018. The respondents also signed various documents, including a notice pursuant to section 383(5) of the Companies Ordinance (Cap 622), specifically acknowledging their debt to the Company.

On 16 April 2019, a judgment of HK$218,552.39 (plus further damages and interest) was entered against the Company in a District Court claim. The Company failed to settle the judgment debt, leading to a winding-up order and the appointment of liquidators in January 2022.

The liquidators sought recovery of HK$2,330,000 from the respondents, alleging the respondents breached their creditor duty by passing a dividend resolution backdated to 15 April 2019 (which was the day before the judgment in the District Court claim) declaring interim dividends of HK$23,300 per share, totalling HK$2,330,000, with the effect of offsetting the directors’ debts to the Company and prioritizing their interests over the creditors’ interests.

The respondents denied borrowing from the Company. They also claimed ignorance of the financial records they signed, and suggested the resolutions were merely accounting devices by their accountants to “write off” wrongly recorded debts after the Company ceased operations in June 2018.

 

 

Key issues and decisions

The Court examined the following issues arising from the respondents’ actions in the context of an insolvent company:

1.         Scope of the creditor duty in relation to dividends

 

A central issue was whether the “creditor duty” – which requires directors to consider creditors’ interests when a company is insolvent – extends to decisions about declaring otherwise lawful dividends.

 

The Court relied on the cases of Re Hongkong Goodstar Enterprise Ltd (HCCW 53/2012, Harris J, 30 April 2015, unreported) and BTI 2014 LLC v Sequana SA [2022] UKSC 25, and affirmed that where a company is insolvent, its directors owe a fiduciary duty to consider the interests of creditors as a whole when making decisions that may affect the company’s financial position. The decisions to declare and pay dividends fall squarely within this category, and the creditor duty can and does apply to otherwise lawful dividends in an insolvency context.

 

In this case, the respondents knew or, at the very least, ought to have known that the company was insolvent by the time of the dividend resolutions, given their roles as directors and shareholders and their knowledge that the Company had ceased operations and had unsatisfied judgment debts.

 

2.         Reliance on alleged ignorance or error to avoid liability

 

The respondents claimed they did not understand the audited financial statements or board minutes they signed, attributing errors to their accountants and auditors.

 

The Court rejected the respondents’ argument, and regarded the respondents’ attempt to distance themselves from the audited accounts and the dividend resolution by claiming ignorance of English and blind reliance on their accountants as “wholly incredible”. The audited statements had been prepared by independent auditors and repeatedly signed by the directors, and there was no coherent explanation as to why professional auditors would, over multiple years, fundamentally misstate dividends as debt due from directors. Contemporaneous documents, including notices of directors’ remuneration and WhatsApp messages with the auditor, corroborated that the directors had been treated and accepted being treated as indebted to the company and that the dividends were used to offset money they had taken. The Court further held that, even assuming the directors’ ignorance, they could not shift blame as they were subject to their own fiduciary duties to the Company.

 

3.         Applicability of the Duomatic principle

 

The directors sought to rely on the Duomatic principle, arguing that as sole shareholders they had effectively ratified their own acts, so that the Company could not complain.

 

The Court noted that the Duomatic principle requires unanimous shareholder assent honestly given at a time when the company is solvent, and those requirements are consistent with the creditor duty and directors’ general fiduciary obligations. In this case, any shareholder assent occurred when the company was already insolvent and, moreover, it was doubtful that the directors were acting bona fide in approving a resolution that substantially extinguished their own indebtedness at the expense of creditors. Thus, the Court held that the Duomatic principle had no application.

 

The Court ordered the directors to pay HK$2,330,000 to the company together with interest, treating that amount as the appropriate sum to restore given that the impugned dividends had reduced the assets otherwise available to the creditors.

Takeaways

This case confirms that directors of an insolvent company, or a company on the edge of insolvency, must treat creditor interests as a central consideration when making distributions. Using dividends or similar accounting devices to eliminate directors’ own indebtedness to the company in an insolvency setting will likely be characterised as misfeasance and breach of creditor duty, with restitution orders under section 276 of the Ordinance; nor can shareholders’ approval be invoked via the Duomatic principle to validate self-benefiting transactions when the company is insolvent or where the decision is not taken honestly in the interests of the company as a whole.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2026